Material participation key to deducting LLC and LLP losses
Abstract: A limited liability company (LLC) or a limited liability partnership (LLP) offers liability protection and flexibility as well as tax advantages. But, until recently, they also had a significant tax disadvantage: The IRS used to treat all LLC and LLP owners as limited partners for purposes of the passive activity loss (PAL) rules, limiting the owners’ ability to deduct losses in the current year. But this article explains that LLC and LLP owners can now be treated as general partners. This makes it easier for them to deduct losses, because they can meet any one of seven “material participation” tests to avoid passive treatment.